Taxpayers can trade services and property with each other in lieu of cash, and most of these transactions never appear in the client’s books because no money moved.
Many taxpayers believe in what I call the “Form 1099 method of accounting”: no Form 1099, no gross income. Since barter transactions are rarely reported on information returns, most taxpayers likely believe they are non-taxable.
Bartering Income
Each party to a barter transaction has gross income equal to the fair market value (FMV) of the property or services received. See §61(a) and Treas. Reg. §1.61-2(d)(1). In Rev. Rul. 79-24, the IRS applied the rule to two situations:
A lawyer and a housepainter swap services. The FMV of the services received by the lawyer and the housepainter is includible in their gross income.
A building owner gives an artist six months of rent-free occupancy for a painting. The FMV of the work of art is gross income to the building owner, and the total fair rental value of the apartment is gross income to the artist.
The character of the income follows the activity type. For example, barter income of a trade or business activity is reported on Schedule C and subject to self-employment tax under §1402(a), while barter income outside a trade or business is generally other income on Schedule 1. See IRS Topic No. 420, Bartering Income.
Property or services paid to an employee in lieu of cash wages are wages. Wages means all remuneration for employment, “including the cash value of all remuneration (including benefits) paid in any medium other than cash.” See §3121(a).
Bartering Valuation
The value of bartered services is the price the provider normally charges for them. Treas. Reg. §1.61-2(d)(1) provides that “if the services are rendered at a stipulated price, such price will be presumed to be the fair market value of the compensation received in the absence of evidence to the contrary.”
In Rooney v. Commissioner, 88 T.C. 523 (1987), an accounting firm that took goods and services from clients in payment of fees could not discount them below normal retail prices on the theory that the items were worth less to the partners personally.
Bartering Deduction
The FMV of what a party gave up in a bartering transaction is deductible only to the extent a cash payment for the same thing would have been. For example, if the services or property received were in a trade or business activity, the FMV of the property or services given up would generally be deductible under §162.
This deduction rule includes the FMV of any credits spent or fees and commissions paid to a barter exchange, as discussed later.
Form 1099 Reporting
A trade or business that uses property or services for payment, rather than cash, has the same Form 1099 filing requirement as if it paid cash. The reporting requirement in §6041(a) reaches “compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income” without regard to the medium of payment, and the FMV of the property at the time of payment is the amount reported.
For payments made after December 31, 2025, the §6041(a) Form 1099 threshold is now $2,000 per calendar year, indexed for inflation after tax year 2026; for tax year 2025 and earlier, it was $600 per calendar year.
A third-party exchange that facilitates bartering transactions is a broker and must file Form 1099-B for each member exchange. A barter exchange with fewer than 100 exchanges during the calendar year or that facilitates the informal exchange of similar services on a noncommercial basis is exempt from filing. See Treas. Reg. §1.6045-1(a)(4) and Treas. Reg. §1.6045-1(e)(2)(ii).
The amount reported in box 13, Bartering, is the gross amount the member received (cash, the FMV of property or services, and the FMV of trade credits or scrip credited to the member’s account. See Treas. Reg. §1.6045-1(f)(4). A cash-method member includes the FMV of trade units in the year they are credited to the member’s account, not the year they are spent. See Rev. Rul. 80-52.
Property Received for Services
Property taken in payment for other property or services takes a basis equal to the FMV included in income. See Treas. Reg. §1.1012-1(a) and Treas. Reg. §1.61-2(d)(2)(i).
The client on the other side has disposed of property under §1001; gain is the FMV of the property or services received over the property’s adjusted basis, and a loss on personal-use property is nondeductible under §165(c). See §1001(b) and Treas. Reg. §1.83-6(b).
Example 1 - Bartering Bethany
In tax year 2026, Bethany, an enrolled agent (EA) with a Schedule C tax business, prepares and files the Form 1120-S for Kevin’s S corporation. Her normal fee is $2,500. In lieu of cash, the S corporation, a plumbing business, replaces the water heater in Bethany’s personal residence, a job it bills other customers $2,300 for. Bethany agrees to accept the $2,300 repair as full payment for her services, so the stipulated price of the exchange is $2,300 on both sides.
There are two tax consequences to this exchange:
Bethany recognizes $2,300 of Schedule C gross receipts, the FMV of the plumbing services she received. She has no §162 deduction; the water heater is a personal expense under §262.
Kevin’s S corporation recognizes $2,300 of gross receipts, the FMV of the tax preparation services it received, and deducts $2,300 for tax preparation under §162.
The S corporation paid Bethany $2,300 in services in the course of its trade or business and should issue her a Form 1099-NEC for $2,300. Bethany issues nothing: she did not make the payment in the course of her trade or business, and a Form 1099 is generally not required for payments to a corporation in any event. See §6041(a) and Treas. Reg. §1.6041-3(p)(1).
Example 2 - Exchange Ernie
In tax year 2026, Esteban, a chiropractor filing Schedule C, joins a barter exchange that values one trade dollar at one U.S. dollar. During the year, he treats other members and is credited 6,000 trade dollars. He spends 1,500 trade dollars on printing for the practice, 2,000 on restaurant meals with his family, and carries 2,500 into tax year 2027. His Form 1099-B shows $6,000 in box 13.
There are three tax consequences to the use of the barter exchange:
Esteban has $6,000 of Schedule C gross receipts in tax year 2026 — the full amount credited, including the 2,500 unspent trade dollars.
The 1,500 trade dollars spent on printing produce a $1,500 §162 deduction, as do any cash fees the exchange charges.
The 2,000 trade dollars spent on family meals are personal and nondeductible.
Reporting the $3,500 he spent, or the $4,500 net of printing, omits $2,500 of gross receipts that the IRS already has on a matched information return.
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